Solution:
(A) Calculation of overhead cost per unit of products A and B using Activity based costing
| Activities |
Cost per unit of Cost Driver (Refer Note 1) |
Cost per 15,000 Units of Product A |
Cost per 10,000 Units of Product B |
| Purchasing, Storage and material handling |
$0.25 |
$12,500
(50,000*0.25) |
$9,000
(36,000*0.25) |
| Engineering and Product Design |
$60.00 |
$600
(10*60) |
$1,500
(25*60) |
| Set up Costs |
$100.00 |
$300
(100*3) |
$500
(100*5) |
| M/c Depreciation and maintenance |
$3.00 |
$90
(3*30) |
$72
(3*24) |
| Factory depreciation taxes insurance and utilities |
$2.50 |
$75
(2.5*30) |
$60
(2.5*24) |
| Other manufacturing overhead cost |
$2.00 |
$60
(2*30) |
$48
(2*24) |
|
|
$13,625 |
$11,180 |
|
|
|
|
| Total: |
$1,400,000 Per Year |
$13,625 |
$11,180 |
|
|
for 15,000 Units |
for 10,000 Units |
|
|
|
|
| Overhead cost per unit (Use 3 decimal place) |
|
$0.908
(13,625 / 15,000) |
$1.118
(11,180 / 10,000) |
Note 1 — Cost per unit of cost driver
| Activities |
Cost/year |
Cost Driver |
Consumption of Cost Driver per year |
Cost per unit of Cost Driver (Cost per year / Consumption of Cost Driver Per Year) |
| Purchasing, Storage and material handling |
$250,000 |
Raw material cost |
$1,000,000 |
$0.25 |
| Engineering and Product Design |
$300,000 |
Hours in design |
5000 Hours |
$60.00 |
| Set up Costs |
$100,000 |
Number of setups |
1,000 Setups |
$100.00 |
| M/c Depreciation and maintenance |
$300,000 |
machine hours |
100,000 hours |
$3.00 |
| Factory depreciation taxes insurance and utilities |
$250,000 |
machine hours |
100,000 hours |
$2.50 |
| Other manufacturing overhead cost |
$200,000 |
machine hours |
100,000 hours |
$2.00 |
| Total |
$1,400,000 |
|
|
|
(B) Overhead Cost per unit of Products A and B, based on direct labor hours.
Total Direct Labor Hours per year = $3,500 DLHs
Total Estimated Overheads per year = $1,400,000
Overhead Cost per Direct Labor Hour = Total Estimated Overheads per year $1,400,000 / Total Direct Labor Hours per year $3,500 DLHs
= $400 per DLH
Overhead Cost per direct labor hour = $400.00 per hour
Product A
Overhead Cost per Unit for Product A = (Direct Labor Hours for Product A 50 Hours x Overhead Rate $400 per DLH) / 15,000 Units
= $20,000 / 15,000 Units
= $1.33 per unit of product A
Product B
Overhead Cost per Unit for Product B = (Direct Labor Hours for Product B 24 Hours x Overhead Rate $400 per DLH) / 10,000 Units
= $9,600 / 10,000 Units
= $0.96 per unit of product B
